H2 Outlook: Analysts Tip Non-Oil Sector To Drive Growth As GDP Eyes 2.63% Y/Y

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The non-oil sector has been tipped to drive the economy in the second half of 2021. Inflation which has maintained an upward trend in most part of the first half is seen to continue to moderate in line with the trend in the last two months in the first half period. Based on the expected rebound in economic activities in the second half of 2021, experts have tipped Nigeria’s Gross Domestic Product (GDP) to end on a stronger and positive note at 2.63 percent as against -1.92 recorded in full year 2020. Lead Analyst at Cordros Securities Limited, Jolomi Odonghanro, hinted that it is expected that liquidity in the foreign exchange market will record appreciable improvement in the second half of 2021, given the knock-on effects of the rally in oil prices and the proposed Eurobond issuance on the FX reserves. “We believe this will put the apex bank better positioned to step up its intervention across the various segment of the FX windows,” he noted.

H1’21 in retrospect

Nigeria’s economy in the first quarter of 2021 recorded a growth, howbeit sluggish as Gross Domestic Product (GDP) improved on the performance in the last quarter of 2020 when it exited recession. The first quarter growth was 0.51 percent year on year compared to 0.11 percent in last quarter in 2020. Growth in first quarter of 2020 was 1.87 percent year on year. Growth in the first quarter in 2021 was driven largely by the non-oil sector which has continued to drive the overall economic performance amid a slower decline in the oil sector. Agriculture and Industry were two major drivers of activities in the non-oil sector in the review period. According to statistics from the National Bureau of Statistics (NBS), both sectors contributed 0.5 percent and 0.22 percent respectively to GDP. The growth in both sectors helped to neuter the negative contribution of the Services sector which dropped by -0.21 percent. Besides the growth recorded in first quarter of the first half in 2021, other positive trends that caught the attention of economic experts was a two months consecutive declines recorded in inflation in April and May. Inflation dropped to 17.93 percent in May compared to 18.12 percent in April. While there have arguments among experts about the declining inflation figures contrary to global trends, the declining trend in inflation is said to hold good promises for both investors and consumers in Africa’s biggest economy. Meanwhile, the nation’s external reserves continues to deplete in the first half of the year with the figure going below the threshold $34billion down to $33billion as at June, a development which economic pundits have described as worrisome. The nation’s rising debt portfolio and the obligation to service it was attributed to the falling dwindling Reserves. Some Analysts have also expressed dismay about headline inflation falling when the naira is daily being weakened. They had expected that a weakened naira will adversely affect the purchasing power of the people which will in turn take its toll on price of commodities.


H2’21 Outlook

The non-oil sector is expected to provide impetus for sustained recovery in second half of 2021 following two quarters of positive albeit sub 1.0 percent growth levels. Analysts at Cordros Securities said they expect Nigeria’s economy to remain on the path of growth over the rest of 2021. Their prediction was based on the expectation that there would be no further lockdown of the economy while the full reopening continues to support domestic demand. The team of analysts in the Research unit of Cordros Securities noted that the increase in oil production and oil prices will also have a positive ripple effect on the other sectors of the economy, given the country’s heavy reliance on the external sector. The outlook report from Cordros noted “In line with our 2021FY outlook, we still expect the non-oil sector to spearhead the rebound in economic growth. Specifically, we expect the Services sector to benefit from the full reopening of the economy as service-oriented companies expand operations after the pandemic-induced rationalisation of activities. Improved activities in the informal sector and the rising activities of payment service banks are also positive for the Telecommunications industry. Meanwhile, government support for the Manufacturing and Agricultural sectors has started yielding results. Overall, we expect Non-oil GDP to grow by 2.31% y/y in 2021E (2020FY: -1.25% y/y).”

Growth drivers


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The Services sector has been tipped to rebound in the second half of the year to contribute meaningfully to economic growth unlike in 2020 when the restriction of movement to combat the pandemic hampered its performance. “We expect the relaxation of the restrictive measures to drive a rebound in the sector. Increased movement of people and goods would positively impact the contact-dependent sectors (Transportation, Education, Accommodation, Entertainment and Trade) despite inflationary pressures.” Similarly, experts expect the ICT sector to sustain its growth, albeit slower than last year, as the impact of high base effect and normalisation of economic activities will boost demand for internet subscriptions. Also, it is expected that commercial banks will expand holdings of government securities at the expense of lending to the real sector despite the penalty implications under the recently instituted LDR/LFR policy. Hence, the preceding should moderate the overall growth of the financial and insurance sector. Overall, it is expected that the contribution of Services sector to GDP will grow by 2.73 percent y/y as against -2.22 percent recorded in full year 2020. Although the effects of the COVID-19 pandemic dealt a significant blow to the Manufacturing sector in 2020FY, Q1-21 performance revealed that improved demand and government COVID-19 stimulus packages were instrumental in the positive growth in the sector despite lingering structural constraints and FX liquidity challenges. It is believed that the Manufacturing sector will continue to grow over the rest of the year as consumer demand recovers and supply chain disruptions begin to dissipate. However, experts highlight that infrastructural bottlenecks and FX liquidity issues will continue to limit the pace of expansion in the sector. But in the overall, growth in the sector is expected to hit 2.28 percent compared to -2.75 percent in 2020. “We are optimistic that low base effects, improved activities in the contact-facing sectors and recovery in the oil sector will sustain the recovery that kicked off in the last quarter of the prior year. Despite persistent security challenges in food-producing states, we expect headline inflation to moderate in H2-21 driven primarily by the high base effect. In addition, we see scope for improvement in liquidity conditions in the FX market given the knock-on effects of the rally in oil prices and the proposed Eurobond issuance on the FX reserves. We believe this will put the apex bank better positioned to step up its intervention across the various segment of the FX windows,” Cordros noted

Policy dynamics

Based on the body language of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria from the meetings held so far in the year, Analysts are of the opinion that the short-term objective of the Apex Bank, is to support economic recovery despite the stubbornly high inflation and imbalances in the external sector. It is expected therefore that the MPC will maintain status quo at least during the next two meeting scheduled to hold in July and September respectively. However, a 50bps hike in the Monetary Policy Rate (MPC) is envisaged at the November meeting as the MPC shifts to a tightening phase. On the fiscal side, it is believed that the spending pattern of the government will not change. So, substantial revenue generated will be directed towards recurrent expenditure and debt servicing, while capital expenditure will be financed mainly by borrowings. However, experts are slightly positive on non-oil revenue given the sustained implementation of the 50 percent increase in VAT that commenced last year, improvement in tax administration framework and the pass-through impact of the rebound in economic activities on non-oil revenue items.

– New Telegraph

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